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Is a remittance a deposit or a payment?

A district court held that an estate’s remittance to the IRS was a
tax payment rather than a deposit. It denied the estate’s refund
request because it occurred after the three-year recovery period had
expired.

Generally, a taxpayer must request a refund of a tax overpayment
within three years from the date the return was filed or two years
from the date the tax was paid, whichever occurs later. Sec. 6603
permits a taxpayer to make a deposit (not considered a tax payment)
with the IRS to suspend interest on a potential underpayment of tax. A
taxpayer can request the return of all or part of a deposit at any
time before the deposit has been used by the IRS as payment of a tax.
To be considered a deposit, a remittance must be accompanied by the
taxpayer’s written statement conforming to the requirements of Rev. Proc.
2005-18. In Moran, 63 F.3d 663 (7th Cir. 1995), when
deciding whether a remittance was a deposit or a tax payment, the
Seventh Circuit applied a facts-and-circumstances test by examining
three factors: when the tax liability was determined, what the
taxpayers intended, and how the IRS treated the remittance upon its receipt.

Marshall Syring, a resident of Superior, Wis., died on Oct. 14, 2005.
The estate’s accountant estimated a $650,000 estate tax liability,
which he believed could be paid over 10 years. On July 14, 2006, the
estate, based on its accountant’s advice, remitted $170,000 to the IRS
and requested an extension of its filing deadline to Jan. 14, 2007;
however, no written statement conforming to Rev. Proc. 2005-18 was
included with the remittance. The estate tax return, which reported no
tax liability, was filed on Feb. 19, 2010. After an audit, the IRS
determined an estate tax liability of $25,526, which the estate did
not contest; however, it requested a refund of $144,474, the remainder
of its remittance. The IRS denied the refund, arguing the remittance
was a tax payment, not a deposit, and the estate’s request for the
refund of the tax payment was not timely. The estate filed suit in the
U.S. District Court for the Western District of Wisconsin.

The court held the remittance was a tax payment, using the
three-factor test of Moran. The court found that under the first
factor, the facts indicated the payment was a deposit, since there was
no formal tax assessment or a defined tax liability at the date of
remittance. However, the court found the other two factors—taxpayer
intent and the IRS’s treatment of the remittance—indicated it was a
tax payment. The estate would have had prima facie evidence that it
intended to make a deposit if it had included a written statement
outlined in Rev. Proc. 2005-18 with the remittance; however, the
estate failed to do so.

The court looked at other factors to determine the estate’s intent
and concluded that three circumstances indicated that the estate
intended to make a partial estate tax payment: (1) the careful
estimate of the estate tax liability and the amount of the remittance
by the estate’s accountant; (2) the manner in which the accountant
completed Form
4768, Application for Extension of Time to File a Return
and/or Pay U.S. Estate (and Generation-Skipping Transfer)
Taxes; and (3) the prompt action by the estate following the
accountant’s instructions.

Concerning the third Moran factor, the court found that the
IRS treated the remittance as a payment since (1) Rev. Proc. 2005-18
states any remittance not accompanied by a written statement will be
treated as a tax payment; (2) the IRS recorded the remittance as a
“payment received”; and (3) it credited the payment to the estate’s
account rather than a separate deposit account. In its conclusion, the
court stated, “This result may seem unfair—after all the government is
allowed to keep a payment that it concedes was not due—but tax laws
are ‘not normally characterized by case-specific exemptions reflecting
individualized equities’ ” (quoting Brockamp,
519 U.S. 347, 352 (1997)).

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